The month that was…

By Unconventional Wisdom on 17/February/2020

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Just when we thought the global economy couldn’t get any more unpredictable, January brought the outbreak of the Coronavirus in China, a US-Iran tit-for-tat engagement, the worst Australian bushfires in recent history and the UK formally leaving the European Union. Yet as usual sharemarkets weren’t overly worried, with the ASX adding 5% (the best start to a year in a decade), and the US falling by less than 1%. This time, it was a stronger than expected US economy, which grew 3% in 2019, supporting higher valuations.

The outbreak of the Coronavirus, which by all reports has now killed over 300 people, couldn’t come at a worse time for the Australian economy. The resulting shutdown of inbound flights from China is likely to have a substantial impact on tourism and when combined with the bushfires will have a negative impact on consumer spending. This comes after a retail spending rebound of 0.9% in November but subsequent slump in December as the Black Friday sales brought spending forward.

The ASX All Ordinaries finally hit 7,000 points in January, this comes some 12 years after it was originally predicted by a number of ‘experts’ to occur in 2008. The key drivers behind the performance were the ever-growing CSL and BHP Group. Interestingly, Australian economic data remains strong, with unemployment falling to 5.1% and inflation holding at 1.8% even as the consensus turns negative towards growth. The S&P 500 and a number of key Asian indices also hit all-time highs during January, before giving back some gains as the month came to an end.

It’s been a busy few months for the profit- for-member of industry super funds, after the APRA Heatmap release in December which embarrassed a number of groups, economist Warren Hogan suggested the largest funds should be forced to hold additional capital not unlike a bank. He suggests the increasing allocations to illiquid assets and market power of the largest funds may represent a systemic risk and should be regulated accordingly. At present, management relies on incoming contributions to ensure

In a sign of the times, the huge venture capital fund run by Softbank, was identified as funding all three of the largest ride sharing competitors in Latin America, Didi, Uber and Rappi, as they attempt to destroy each other and win the important Such is the size of the fund that they can bet on all three players and still expect to make a profit.

The Chinese economy benefitted from the actual signing of the Phase 1 Trade Deal with the US, however, many are questioning whether China can actually facilitate the purchase of an additional $200bn in US exports by 2021 as agreed. It is likely to have a negative impact on China’s other trading partners, including Australia and the US, as commodities like LNG and motor vehicles are sourced from the US. Chinese growth hit 6.1% for 2019 but many now expect it to fall below the 6% mark for the first time. Positively, industrial production is improving once again, up 5.7%, and retail sales continuing to boom, up 8%. The result was an improvement in the IMF’s global growth forecast, from 2.9% to 3.3% and Japan’s as well, from 0.5% to 0.7%.

It was the well-known technology stocks that lead the market higher as the decade turned into 2020, with Facebook, Apple and Google all hitting all-time highs during the month. Many are suggesting these valuations are reasonable given robust fundamentals and exceptional growth levels like Facebook’s 24% year on year revenue growth and 56% earnings margin. Amazon initially under performed but reached another high after hours following a 50% beat on its earnings per share estimate for the final quarter.

President Trump appears to have beaten the self-titled impeachment ‘witch-hunt’ with the Democrat’s unable to swing enough Senators to include additional witnesses in their high profile trial. The consensus appeared to be that there was little value in proceeding with the impeachment for the party given the President has just 10 months before another election.

After a multi-year boom in the share prices of the few Australian lithium miners, the sector has been hit with a reality check in recent months. Galaxy Resources (GXY) announced that production at their Mt Cattlin mine would be put on hold for the foreseeable future, blaming an oversupply and subsequent 50% drop in lithium prices for the closure. They joined the likes of Pilbara Minerals and Mineral Resources to reduce production.

In a year when almost every asset class delivered strong returns, the renowned Ray Dalio and his Bridgewater Associations Pure Alpha Fund suffered its first annual loss, dropping 0.5% in the year, piling more pressure on the hedge fund sector as investors find more reasons to move towards passive strategies. Another hedge fund manager, AQR Capital, stressed that future returns remain lower than ever, indicating their internal models predict annualised returns of just 4% from a traditional 60/40 balanced portfolio.

Engineering and construction specialist CIMIC Group, previously Leighton’s, unexpectedly reported a $1.8bn writedown due to unpaid debts in Dubai, exacerbated by delays and additional costs on the West Gate Tunnel project. They weren’t alone in confession season, with agricultural supplies outfit, Nufarm, forecasting a weaker second half, along with e-commerce retailer Kogan, and Treasury Wine Estates, which was once again hit by an oversupply of cheap wine in the key US

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